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Smithfield Foods Inc. v. United States

United States District Court, E.D. Wisconsin

March 20, 2017

SMITHFIELD FOODS, INC., et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          DECISION AND ORDER

          LYNN ADELMAN United States District Judge

         On July 5, 2009, a fire at a large pork-processing facility owned by Patrick Cudahy, Inc. (“PCI”), caused substantial damage to the company's property. In the present action, PCI and its parent company, Smithfield Foods, Inc., along with six of Smithfield's property insurers, bring claims against the United States under the Federal Tort Claims Act. They allege that the United States was negligent in allowing a military flare to be stolen from one of its bases. This flare ignited the fire at the PCI plant. The parties have settled the liability component of this case, leaving for the court the question of the amount of damages to award to the plaintiffs. Between November 16, 2015 and November 23, 2015, Judge Randa of this court presided over a bench trial concerning the amount of damages. However, Judge Randa passed away before issuing his findings of fact and conclusions of law. The case was then reassigned to me.

         In an effort to resolve this case without recalling any witnesses, see Fed. R. Civ. P. 63, the parties proposed that I decide four issues that bear on the computation of the plaintiffs' damages. The parties believe that after these issues are resolved, they will be able to reach a settlement concerning the amount of damages. The parties have since filed briefs on these four issues, and I address their arguments below. Judge Randa previously determined that California substantive law applies to this case, see ECF Nos. 192 & 195, and therefore I apply that state's law in resolving these four issues.

         Before turning to these issues, I note that my addressing them should not be viewed as a license to the parties to present new evidence that wasn't presented at the trial in November 2015. That is, if I had answered these questions as part of a ruling on motions before trial, the parties would have shaped their trial presentations to match my answers. However, what I am doing now is essentially rendering partial findings of fact and conclusions of law based on the evidence actually presented at trial. See Fed. R. Civ. P. 52. It is now too late for the parties to present testimony that might better match my answers to their questions. Thus, the November trial record will control unless I later determine that it is necessary to recall witnesses under Federal Rule of Civil Procedure 63.

         I. Measure of Loss for “Customized Machinery”

         The plaintiffs frame the first question as follows: “Is the measure for the loss of PCI's customized machinery its actual cash value or its replacement cost?” Br. at 1, ECF No. 219. The plaintiffs do not ask me to determine what property qualifies as “customized machinery, ” and they do not ask me to determine the actual cash value or replacement cost of any specific item of personal property. Rather, the plaintiffs ask me to decide the proper methodology for determining the value of any property later deemed to be customized machinery: is it actual cash value or replacement cost? As the parties use the term, “actual cash value” means replacement cost less depreciation. See Tr. at 842, 850.[1] Thus, it appears that the dispute is over whether depreciation should be deducted from the replacement cost of an item of custom property.

         Under California law, the measure of damages for the loss or destruction of personal property is the value of the property at the time of such loss or destruction. Hand Elecs., Inc. v. Snowline Joint Unified Sch. Dist., 21 Cal.App.4th 862, 870 (1994). Thus, my goal in this case is to award the plaintiffs the value that PCI's food-processing equipment had just before the fire destroyed it. In general, this will involve determining the equipment's fair market value at that time. See Cal. Civ. Jury Instr. 3903K. “Fair market value” is the highest price that a willing buyer would have paid to a willing seller assuming that there is no pressure on either to buy or sell and the buyer is fully informed of the condition and quality of the property. Id. However, courts recognize that there are situations in which fair market value is not the proper measure of the loss. For example, in Kimes v. Grosser, the court held that the measure of damages for a pet cat intentionally injured by the defendant was the reasonable cost of the veterinary care the owner reasonably incurred after the injury, even though the fair market value of the cat was negligible. 195 Cal.App.4th 1556, 1561-62 (2011). In Kimes, the court recognized that where property has no fair market value, the property's value “must be ascertained in some other rational way, and from such elements as are attainable.” Id. at 1561.

         In the present case, the parties agree that, to the extent it is possible to identify a fair market value for PCI's machinery and equipment, then fair market value should be used to determine damages. At trial, the parties' witnesses calculated fair market value by finding used equipment on the secondary market that was equivalent to the PCI equipment lost in the fire. See Tr. at 387, 849. However, equivalents to much of PCI's equipment could not be found on the secondary market, which made it impossible to determine the fair market value of that equipment. According to the defendant, some equipment was simply not available on the secondary market at the time the parties were looking. But the equipment at issue for present purposes is equipment that would never be available on the secondary market because PCI had that equipment custom-made.

         The plaintiffs contend that California has adopted a rule stating that damages for the destruction of custom equipment or property is replacement cost. In support of this contention, the plaintiffs cite two cases. The first case is Leslie Salt Co. v. St. Paul Mercury Insurance Co., 637 F.2d 657 (9th Cir. 1981). In that case, the plaintiff manufactured salt by removing it from seawater. An accident damaged a custom-made machine that the defendant used for stacking salt. The defendant argued that the measure of damages for the stacker should be its fair market value. However, the court found that there was no market for the custom-made stacker, and that therefore the rule requiring use of fair market value to measure damages was inapplicable. Id. at 660. The court then wrote that “[t]he law has long recognized that the actual cash value of property with no market may be measured with reference to the cost of replacement.” Id. The court determined that, for this reason, the trial court did not err in giving the following instruction to the jury:

In determining the actual cash value of the property damaged, it shall be as of the time of the commencement of the loss on August 15, 1973, and shall be ascertained according to such actual cash value with proper deduction for depreciation, however caused, and salvage value and shall in no event exceed what it would then cost [the plaintiff] to repair or replace the same with material of like kind and quality.

Id.

         The plaintiff contends that the Leslie Salt court held that “where custom property with no market is concerned, replacement cost is the measure of recovery.” ECF No. 219 at p. 12 of 14. However, this is not an accurate statement of the court's holding. The court held that the actual cash value of property with no market may be measured with reference to the cost of replacement, not that the value was the cost of replacement. And the jury instruction that the court approved instructed the jury to make a “proper deduction for depreciation, ” and also that replacement value was merely a cap on the amount of damages. Essentially, then, Leslie Salt approves the method that the United States used for determining the value of the plaintiff's custom property: the court must start with replacement cost and then take a proper deduction for depreciation. In this way, the court measures value “with reference to” replacement cost, but it does not simply identify the replacement cost and award that cost as damages.

         The plaintiffs' other case is PCB Productions, Inc. v. MJC America, Ltd., No. B242443, 2014 WL 2514624 (June 4, 2014), which is an unpublished decision of the California Court of Appeal. In that case, a defective product caused a fire in the plaintiff's recording studio that, among other things, destroyed the plaintiff's library of sound samples that it used to create audio for movies, television, video games, and other media. The plaintiff created this library over a 25-year period by traveling around the world and recording various sounds. The plaintiff argued that the sound library was unique and had no market, and that therefore the proper measure of damages was the cost to reproduce the library, as measured by the time and travel costs associated with recording the sounds. Id. at *5. The defendant argued that because commercial sound libraries were available for purchase, the plaintiff's sound library in fact had a fair market value. Id. at *7. Therefore, the defendant argued, the proper measure of damages was fair market value rather than replacement cost. Id. The court found that the jury could reasonably find that the plaintiff's sound library had peculiar value to the plaintiff, and that the market value of a commercial sound library did not represent the value of the plaintiff's custom library. Id. at *13-14. The court then found that if the plaintiff's unique sound library had no market value, a “just and rational” way to measure the plaintiff's damages would be replacement cost. Id. at *14.

         The PCB case does not stand for the proposition that the measure of damages for all custom property is replacement value. Rather, the point being contested in that case was whether the plaintiff's library was comparable to a commercial sound library that could be purchased “off the shelf.” If it was, then the fair market value of the commercial library would have been the measure of the plaintiff's damages. The court's opinion in the case does not suggest that the defendant disputed that replacement cost would be the proper measure of damages if the court determined that the plaintiff's library was not comparable to a commercial library. Indeed, if the library were not comparable to a commercial library, it is hard to see any way of measuring damages other than by the cost of traveling around the world and re-recording the sounds. Moreover, the defendant would not have had any grounds to argue for a depreciation deduction, as sounds do not wear out or become obsolete.[2] Thus, the PCB case is simply one instance in which it made sense to measure damages for custom property by its replacement cost. It does not stand for some broader rule that the measure of damages for all custom property is replacement cost.

         In the present case, PCI's custom property is not comparable to the sound library in the PCB case. Unlike sounds, equipment used in a food-processing facility will eventually wear out or become obsolete, and thus a deduction for depreciation will be appropriate, as it was in the Leslie Salt case. The plaintiffs contend that PCI's custom property did not deteriorate because PCI took extremely good care of it. However, while PCI might have maintained its property in as pristine a condition as possible, that does not mean the equipment's value did not depreciate over time. No matter how well PCI maintained this equipment, I do not believe that a third party who could have used it would have paid as much for PCI's equipment, which had been heavily used in a pork-processing facility over many years, as it would have for the same equipment new and unused. In any event, even if I believed that PCI's equipment never physically deteriorated (which I do not), the property would lose value over time as it became obsolete. PCI's own witness testified that it would replace equipment as new, more efficient equipment became available. See Tr. at 183 (PCI would replace equipment “if we can find an improvement in speed, reduction of people, something that would give us an appropriate return on investment”). Thus, to answer the plaintiff's first question, I find that the proper measure of damages for PCI's custom property is replacement cost less depreciation, i.e., the actual-cash-value methodology employed by the defendant's expert, Mark Ewing.

         II. Mechanical, Electrical, and Plumbing Utilities

         The second question relates to the value of certain mechanical, electrical, and plumbing utilities, or “MEP.” The parties agree that MEP that would be found in any commercial facility, such heating and air conditioning, light fixtures, and plumbing for restrooms, should be valued as part of the real estate. However, they dispute whether MEP that serviced PCI's specialized food-processing equipment should also be considered part of the real estate. The plaintiffs describe this kind of MEP as “utility lines, ammonia piping, grease collection lines, etc. that are installed for the sole purpose of servicing the food processing equipment at the facility.” Br. at 2, ECF No. 220. The plaintiffs do not explain in detail what this kind of MEP consists of. However, from their use of the terms “piping” and “lines, ” ...


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